TITLE: THE EXTENT OF EFFICIENCY IN CENTRAL EUROPEAN EQUITYMARKETS

AUTHOR: RANDALL K. FILER and JAN HANOUSEKCity University of New York

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DATE: June 25, 1997

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EXECUTIVE SUMMARY

The Extent of Efficiency in Central European Equity Markets

Randall K. Filer and Jan Hanousek

The paper begins with a discussion of the structure of the equity market in four Visegrad

countries (The Czech Republic, Hungary, Poland and Slovakia). It finds that only the Czech

Republic approaches any Western economies in the size and liquidity of its market. All four,

however, have disclosure requirements for the major stocks (that form the bulk of market

capitalization) that should be sufficient to ensure a well-functioning market. The source of these

requirements differs by country, arising in legal structures in Poland and Hungary but in private

arrangements on the stock exchange in the Czech Republic.

The bulk of the paper tests weak form efficiency in these markets. A market is said to be

weakly efficient if it is not possible to make excess returns using any trading strategy based on past

price movements of a stock. Another way of saying this is that the pattern of stock prices follows a

random walk. A number of tests of this hypothesis are preformed using both weekly and monthly

data for the main market index in each of the four countries. Results for all countries suggest that

while there may be some level of serial correlation in each country (with returns in one period

related to those in the previous period), in general the patterns seen are far short of being statistically

significant. Thus, the general conclusion is that, despite their newness, all of these markets exhibit

behavior that is consistent with weak form efficiency.

THE EXTENT OF EFFICIENCY IN CENTRAL EUROPEAN EQUITY MARKETS

Randall K. Filerand

Jan Hanousek1

ABSTRACT

This paper investigates the possibility that the newly emerging equity markets in Central Europeexhibit a degree of efficiency similar to that which prevails in more developed markets. Thedifferent privatization strategies adopted by the various countries in the region are shown to havecreated equity markets of vastly different sizes with the largest market, that in the Czech Republic,being similar in coverage to many in Western Europe. Disclosure requirements appear to besufficient for efficiency although there are differences across countries in whether these requirementsare based in law or depend on voluntary action as well as the extent to which they are enforced.Both distribution based and distribution-free tests do not reject the hypothesis that equity marketreturns are random walks in the four Visegrad countries. This finding is consistent with thesemarkets being weak-form efficient. The paper concludes with a discussion of ways in which otherforms of efficiency could be tested for these markets.

I) INTRODUCTION

Perhaps one of the most controversial issues in modern economics is the extent of efficiency in

capital markets. Dozens of papers each year address some aspect of this debate. In general three

forms of market efficiency are discussed. Each asserts that it is impossible to make predictable

excess returns beyond the level justified by a security's riskiness on the basis of a particular

information set. The difference between them lies in the information sets that prices are asserted to

reflect.

(1) A market is weakly efficient if prices fully reflect all information contained in historic

price series. Such efficiency implies that stocks follow a random walk and that it is,

therefore, impossible to earn excess returns by using information in the pattern of stock

prices, a technique known as technical analysis.

(2) A market is semi-strongly efficient if security prices fully reflect all publicly available

information that might influence the value of a given company. This form of efficiency

implies that fundamental analysis of a firm's situation and the economy in general will

not enable an investor to earn excess returns.

1Randall K. Filer is Professor of Economics at Hunter College and the Graduate Center of the City University of NewYork and the Coaler for Economic Research and Graduate Education (CERGE), Charles University, Prague and SeniorResearch Scholar at the Economics Institute of the Academy of Sciences of the Czech Republic (EI). Jan Hanousek isAssociate Professor of Economics at CERGE and Senior Research Scholar at EI. This research was supported in part bygrants from the National Council for Soviet and East European Research and the Grant Agency of the Czech Republic.

(3) Finally, a market is strongly efficient if all information that is known to any investor,

including insiders, is reflected in security prices. This implies that there is no way any

market participant can predictably make excess returns.

Although there is a great deal of controversy as to whether securities markets exhibit each of

these forms of efficiency, a consensus seems to be emerging that while temporary pricing anomalies

may exist, in the end "one has to be impressed with the substantial volume of evidence suggesting

that stock prices display a remarkable degree of efficiency (Malkiel (1996) p. 222)."

A number of studies in recent years have investigated the efficiency of emerging equity

markets, primarily in Asia and Latin America. Among these are Claessens, Dasgupta and Glan

(1995), Cornelius (1995), Harvey (1995), Urrutia (1995), Zychowicz, Binbasioglu and Kazancioglu

(1995), Agbeyegbe (1994), Agrawal and Tandon (1994), Ajayi and Meyhdian (1994), Annuar. Ariff

and Shamsher (1994), Ayada and Pyun (1994), and Stengos and Panas (1993). Although the results

of these studies can best be characterized as mixed, they find a surprising amount of evidence that

emerging markets are approximately as efficient as those in developed countries such as the U.S.

Claessens, Dasgupta and Glan, for example, find that "stock price behavior in the twenty stock

markets represented in the International Finance Corporation's Emerging Markets Data Base displays

few of the anomalies found for industrial economies,2" while Urrutia concludes that investors in

Latin American markets would "not be able to detect patterns in stock prices and develop trading

strategies that would allow them to earn abnormal returns." In general, the strongest evidence

against efficiency in emerging markets is the presence of autocorrelation in returns, a phenomenon

that some have suggested is an "indicator of economic growth rather than evidence against the

efficient market hypothesis.3"

The past half decade has seen one of the most extraordinary changes in economic systems ever

recorded. Commonly called the transition, the shift from command to market economies in Central

and Eastern Europe including the Former Soviet Union has radically altered the lives of nearly 10%

of the world's population. A major component of this transition has been the rapid privatization of

formerly state assets. By the end of 1995 between two-thirds and three-quarters of economic output

in the Visegrad countries (Poland, the Czech Republic, Slovakia and Hungary) was produced in the

private sector, an increase from virtually nothing in 1989..

A natural question is the extent to which the equity markets of Central Europe have achieved a

degree of efficiency comparable to markets in developed countries or emerging markets with much

longer histories. Efficient markets may play an important role in the success of the transition.

There are obvious advantages to efficient markets, especially of the strong form. The transition

Claessens, Dasgupta and Glan (1995) p. 150.3Urrutia (1995) p. 308.

economies need large amounts of capital for restructuring. Banks are weak and undercapitalized and

will have, therefore, limited ability to finance investment activity. Many firms are not yet

profitable enough to finance necessary restructuring through retained earnings. This situation

suggests that there must be a great deal of reliance on equity finance. Investors who have

confidence that markets can not be manipulated by insiders will be more willing to invest in such

markets, thereby lowering the cost of capital. Similarly, especially in countries such as the Czech

Republic where large-scale distribution of shares has played a major role in privatization, public

support for the transition is likely to be a function of public perception of the fairness of the market

in which they must dispose of their shares when they want cash. Thus, a finding of significant

deviations from efficiency would be troubling for the transition process.

There are, however, other reasons why efficient markets may actually hamper the transition to

a market economy in Central Europe. One of the biggest problems in the region is the need for

effective mechanisms of corporate control. This may be especially important in countries such as the

Czech Republic where voucher privatization has created a large number of dispersed owners.

Without mechanisms for corporate control, privatization may fail because insiders from the former

regime can strip firms of their valuable assets or otherwise hamper evolution to a market economy.

Left unchecked, insiders in a firm (workers and managers) will tend to operate the firm for their

private benefit, ignoring the owners' interests. Thus, such firms may pay excessive wages and

salaries, sell assets to managers at below market prices, or sign "sweetheart deals" with insiders or

their relatives for materials and services at above-market prices4. Diffuse individual owners, each

with only a small stake in the firm, cannot effectively monitor and control such practices. Large

holders such as mutual funds, on the other hand, have both the power and the incentive to oversee

managers. Thus, the evolution of mutual funds that can exercise corporate control is typically

regarded as one of the success stories of Czech privatization and is a component in many countries'

privatization plans.

Mutual funds can only exist, however, if they charge their shareholders a fee to cover

operating costs. If markets are strongly efficient, so that the return available from funds is no

greater than that available through individual investing, there is no reason for an individual investor

to join a fund. This would necessitate paying a management fee for no added return. Even though

investors as a whole would be better off with effective corporate control, there is a classic prisoners'

dilemma problem with each individual investor seeing that he or she would be better off outside the

4Another problem comes from the fact that the government retains a significant stake in many "privatized" firms.Without countervailing large stakeholders, the shares retained by the governments (typically in the privatization agenciesor national property funds) become a controlling interest that may be used to direct firm behavior in the interest of thegovernment rather than the firm's owners. There are several instances in the Czech Republic where the Fund for NationalProperty has used its influence to force supposedly private firms to invest in potentially failing firms at above market pricesin order to enable the government to avoid having to rescue these firms from the public purse.

fund, no matter what other investors opted to do. Thus, few investors could be expected to join

funds. This behavior implies that the more efficient the capital market, the more important it is for

alternative institutions of effective corporate governance to develop in transition economies.

Thus, the issue of the extent to which equity markets in Central Europe are or are not

classically efficient is not only of intellectual interest since these markets may play a critical role in

the future development of the region. This essay first discusses the extent to which the structure and

operation of Central European equity markets approximates the conditions required for efficiency. It

then reports results of the some initial tests of various forms of market efficiency and suggests future

approaches for evaluating other types of efficiency. Finally, it concludes with a discussion of the

extent of efficiency in the artificial closed equity market created by the Czech voucher privatization

process. The efficiency of this artificial market is of more than theoretical interest since other

countries such as Romania, Bulgaria and Ukraine are in the process of implementing similar

privatization mechanisms.

II) INSTITUTIONAL MARKET STRUCTURE

For markets to be efficient, it is widely assumed that they must possess certain fundamental

characteristics. In particular:

(1) there must be a reasonably large number of profit-seeking investors who actively

participate in the market; and

(2) information must be freely available to all participants at approximately the same time.5

In short, markets are likely to exhibit a reasonable degree of efficiency if there is active trading,

disclosure of relevant information, and prohibitions on taking advantage of inside information. To

what extent do Central European equity markets exhibit these characteristics?

Table 1 gives an indication of the extent of and degree of liquidity in Central European

markets at the end of 1995 compared with other emerging markets and markets in Western Europe.

Figure 1 presents one aspect of market extent, the ratio of market capitalization to GDP for selected

countries for 1995 as well as for the Central European markets for the three years from 1993 to

1995. Several things stand out in this table and figure. The first is that the choice of free

distribution of vouchers as the primary mechanism of privatization in the Czech Republic has

resulted in a vastly different capital market than prevails in other Central European countries, where

direct sales of enterprises played a much larger role.6 At the end of 1995 over 1,600 firms were

5Note that this can be achieved either if there is no inside information (an unlikely occurrence) or if trading on the basisof inside information is effectively prohibited.

6Slovakia represents an intermediate case, paralleling the Czech use of vouchers prior to the splitting of the formerCzechoslovakia on January 1, 1993 but relying on direct sales (often to politically connected insiders) since then.

traded on the Czech equity market as opposed to 42 firms in Hungary and 65 in Poland.7 The

aggregate value of these firms (market capitalization) amounted to 35% of GDP in the Czech

Republic but only 6% of GDP in Hungary and 4% in Poland.8

The Czech ratio of market capitalization to GDP is similar to that in many Western European

countries and significantly higher than in southern members of the European Union.9 On the other

hand, it lags behind the "Asian tiger" economies as well as Chile in Latin America where the shift

to private, fully-funded pensions has created an equity boom over the past decade. It is interesting

to speculate whether this difference in market capitalization per dollar of current GDP represents a

speculative bubble in the emerging markets or an appropriate valuation of future growth rates in

these largely unregulated and low-tax economies compared to the slow-growth environment of the

European Union. Assuming that a similar share of GDP is produced by traded firms in each

country,10 the implication is that the Czech Republic has perhaps been too successful in achieving

its desire to resemble the EU. The market may be judging, therefore, that its growth rate is more

likely to resemble the stagnant European environment than the dynamic Asian one.

In addition to its relatively large size, there is also a good deal of trading activity in the Czech

equity market, with turnover ratios similar to those in much of the world. Although turnover ratios

are higher than average in Poland and Slovakia, this ratio must be evaluated in light of the very

small markets in these countries. Apparently the Czech Republic has done a better job than other

Visegrad countries in achieving the first precondition for market efficiency, the existence of an active

market with many participants. The interesting question is whether this difference in structure

translates into a difference in performance as well.

Before addressing this issue we turn to a discussion of the second important condition for

market efficiency, the prompt and public disclosure of relevant information. There is a great deal of

debate in the academic literature regarding whether mandatory disclosure requirements are needed in

order to overcome incentives by firms to be overly restrictive in releasing information for strategic

competitive reasons (see Dye (1990) and Demski and Feltham (1994)) or whether firms have

sufficient incentives to voluntarily provide the optimal amount of disclosure so that regulations would

at best be irrelevant and at worst interfere with optimal contracting and impose costly burdens on

financial markets (see Bentsen (1973), Leftwich (1980), and Phillips and Zecher (1981)). The

7The number of traded companies in the Czech Republic was greater than in any developed economy except Japan,the U.K. and the U.S.

8By the end of 1996 this ratio had increased to 43% in the Czech Republic, 12% in Slovakia, 11 % in Hungary and7% in Poland.

9Comparable figures were 17% in Austria, 28% in Germany, 39% in France and Denmark and 45% in Belgium.Among southern EU members market capitalization was 20% of GDP in Portugal, 21 % in Greece and Italy, and 37% inSpain. The U.S. is exceptional in the value of its equity markets, with total market capitalization exceeding GDP, a featureit shares with only the United Kingdom and the Netherlands among developed economies.

'"Something we have tried, but so far have been unable, to verify.

Visegrad countries have divided sharply regarding which side of this debate has guided their policies.

In Poland, disclosure requirements are derived from an order of the Council of Ministers (cabinet)

and apply to all publicly traded shares in manner similar to that in the U.S. In the Czech Republic

and Hungary, on the other hand, legally required disclosure is minimal. Instead, the stock

exchanges have issued requirements for firms desiring to be listed for trading in the main-market."

In each country there is also a so-called "free" or "parallel" market where firms may trade

without meeting the disclosure requirements for listed firms. Recently there have been proposals in

these countries to create securities commissions with the power to extend disclosure requirements to

all firms. In the meantime, the stock exchange in the Czech Republic has announced its intention to

extend disclosure requirements by creating a formal secondary market (with slightly less restrictive

disclosure requirements, mainly in that firms must file reports semi-annually rather than quarterly)

and over time eliminate trading in the free market with no disclosure requirements in an attempt to

persuade firms to shift to the primary or secondary markets.12 By mid-1996 75% of market

capitalization and 71% of trading volume in the Czech Republic were in stocks where extensive

disclosure requirements applied. The coverage of these requirements is indicated in Appendix I.

which reproduces selected sections of the December 1995 "Requirements for Admission of a

Security to Trading at the Prague Stock Exchange." Requirements for listing in Hungary and

Slovakia and for all firms in Poland are similar. Thus, for listed firms at least, disclosure rules

seem to be as extensive as those in the U.S. (and probably more comprehensive than in most of

Western Europe). They would appear to be sufficient to promote market efficiency provided that

these rules are enforced.

In Central Europe, however, we must always ask if rules as written are followed in practice.

There is at least some evidence that regulations that appear to offer sufficient requirements for timely

disclosure are not adhered to. In particular, firms assembling blocks of shares for the purpose of

taking control of a firm have reportedly decided that shares bought by wholly owned subsidiaries do

not count towards the requirement that intentions much be announced once a certain number of

shares have been purchased on the grounds that these shares are owned by independent legal entities.

It is also clear that no market can be strongly efficient without effective prohibitions on insider

trading. Once again, the Visegrad countries have adopted rules against insider trading that mirror

those in more developed markets although once again these often rely more on the stock exchange

11Interestingly, these regulations were issued by the Stock Exchange Chamber in the Czech Republic and the StockExchange Council in Hungary. In each country, therefore, regulations may carry some hidden prima facie weight becausethey were issued by the "S.E.C". a set of initials that may register in investors' subconscious. We have no indicationregarding whether the choice of names yielding these initials was deliberate.

12The first 400 firms were delisted in the spring of 1997 and it is anticipated that between 200 and 400 more firms willbe delisted from the free market by the end of the year.

for application of sanctions than national law enforcement agencies. The regulations of the Prague

Stock Exchange, for example, state that:

Any person who, due to his/her job, profession, position, and/or function, is authorized toacquire a confidential information on economic and/or financial position of an issuer and/orother facts important for the development of either the financial market and/or prices ofsecurities is neither allowed to conclude trades in these securities nor to exploit his/herinformation for his/her own benefit or benefits of other persons until this information becomesgenerally public.

The sanctions the exchange can impose, however, are limited. Maximum fines are about

$2,000. The most serious sanction involves a prohibition against future trading on the exchange.

Once again, the face validity of the sanctions would be greater if they were codified in criminal law

and applied by the public authorities. Here again Poland has far more stringent rules than the other

countries, with the law providing for between 6 months and 5 years imprisonment for anyone "who

uses insider information while trading in securities." where insider information is defined as any

"information which has not been made public but which after publication could substantially

influence the value or the price of a security."

In summary, the extent of the Czech stock market seems to be the most conducive to market

efficiency, but the institutional structure of the Polish market contains more extensive disclosure

requirements and prohibitions against insider trading. It is clear, however, that there are numerous

reasons why these markets may fall short of efficiency, implying that no conclusion can be reached

regarding which, if any, of them approximate the degree of efficiency found in the West without

empirical tests. In the only published work on efficiency in Visegrad stock markets to date, Gorden

and Rittenberg (1995) show that limit trading rules (which suspend trading when a share price rises

or falls by a given amount in a single session) create positive serial correlation in daily returns

among Polish stocks, with the mean price change on days following coming near the upper limit of

plus 10% being 3.32% as opposed to a 0.43% change on other days. This is not a surprising result

and is likely to exist in all the markets in the area since they all have similar limit move rules. This

type of serial correlation does not, however, necessarily represent market inefficiency since it may

not be possible to earn excess returns by following a trading strategy based on buying stocks that hit

the upper movement limit. Suppose that all such stocks simply opened at a significantly higher price

the following day so that buy orders entered at the end of day one were executed after the full move

on day two. Obviously, in this case serial correlation in daily returns would not enable an investor

to earn excess returns.

III) TESTS OF WEAK-FORM EFFICIENCY

As discussed above, weak-form efficiency implies that stock prices should follow a random

walk. One common way of testing whether this is the case is by examining variance ratios (Lo and

MacKinlay (1988)). This test is based on the fact that if the natural logarithm of a time series is a

pure random walk, then the variance of its q-differences will increase in direct proportion to the

length of the difference q. The variance ratio is defined as:

where times the variance of the q-differences and is the variance of the first-

differences.13 Standard normal test statistics are provided by Liu and He (1991) under both

homoskedasticity and heteroskedasticity.14 Table 2 presents the results of variance ratio tests of the

hypothesis that securities prices follow a random walk in each of the Visegrad countries. In each

case the test was performed on monthly returns of the main index for each country15 from the date

the index was first calculated to July, 1996.16 As can be seen in Table 2, the pattern of statistical

significance is mixed under the assumption of homoskedasticity if we consider each lag length

independently. Technically, rejection of a variance ratio equal to one for any lag length is sufficient

to reject the random walk hypothesis. However, given that multiple tests are being performed the

appropriate significance level is not given by reference to the standard normal tables (see Chow and

Denning (1993). Thus, the final row in the table reports the maximum z score across all lag lengths

examined along with an indication of statistical significance using appropriate Studentized Maximum

Modulus (SMM) confidence intervals (see Stolin and Ury (1979)). Although we are frequently

unable to reject the random walk hypothesis, in all cases the actual variance ratios are greater than

one. We must ask, therefore, if the results found are due to positive autocorrelation in returns or

heteroskedasticity where if we model the returns in any of the Central European markets as a mean

value plus a random "error" term, the magnitude of the random term is growing over time. This

would not be a surprising finding in a world where markets are developing rapidly. Both volume

and frequency of trading has been increasing in each of the markets under study, with all markets

moving from trading one or two days a week with a single price fixing per day to daily trading with

continuous pricing. It is to be expected that the more fully functioning markets might exhibit more

price movement per unit of time. In addition there have been frequent non-regular "interventions"

13Formulae for calculating <r(q) and (r(l) were taken from Lo and MacKinlay (1988) and are not reproduced here.Note that since these are the differences in log prices the test is one of whether returns (not prices) are predictable or followa random walk.

14Again the reader is referred to the original source for the exact form of the test statistics. Both produce a z-scorethat is distributed N(0,1).

15The PX-50 for the Czech Republic, BUX for Hungary, WIG for Poland and SAX for Slovakia.16We report results for q= 3, 6, 9 and 12. We have also performed the test for the intervening lag periods with no

change in the pattern of results. Complete results are available from the authors on request.

8

into the equity markets in the region by the local agencies charged with privatizing former state

enterprises, typically in the form of selling blocks of shares in these enterprises on the secondary

market as a part of the privatization process. These features suggest that heteroskedasticity may be

characteristic of returns in Central European markets. Indeed, once heteroskedasticity is allowed, in

no country do we reject the hypothesis that variance ratios are equal to one, suggesting that returns

in Central European equity markets follow a random walk.

Although the literature testing for random walks often uses monthly data, as we did in Table 2.

there is generally a longer time period over which to test the hypothesis than is available in Central

Europe where we have at most three and a half years of data. Table 3 reports the results of

repeating the analysis using weekly returns for differences in q of one month, two months, three

months and six months. With the larger sample size the results are unambiguous. If we did not

allow for heteroskedasticity, the random walk hypothesis would have been rejected for every country

for every time difference. Once heteroskedasticity is allowed for, however, we are never able to

reject the random walk hypothesis.

One potential problem with variance ratio tests of the random walk hypothesis is that they rely

on an assumption of normality in the random component of returns. Table 4 presents the first four

moments of the distribution of returns for each Central European market. Since the distribution of

returns consisting of a constant term plus a normally distributed random component will also be

normal, rejection of normality for the distribution of returns indicates that variance ratio tests may be

inappropriate for this data. As can be seen in Table 4, with the possible exception of Poland, the

assumption of normality in returns is rejected for every country. The pattern of positive skewness

and kurtosis indicates that returns are more flattened to the right and more highly peaked than would

be the case if they were normally distributed. An alternative, distribution-free test for the

independence of successive returns relies on the number of runs (Levene (1952)), where a run is

defined as a sequence of consecutive changes in returns in the same direction. We report the results

of such a test in Table 5. In general there are fewer runs in returns than would be expected if

returns followed a random walk (e.g. were not predictable based on prior returns), indicating some

persistence in returns. However, only in the case of monthly returns in Slovakia is this difference

statistically significant at the 5% level. Thus, once again, the preliminary evidence is that equity

markets in Central Europe are close to being weak-form efficient. Our results for monthly returns

are similar to those reported for emerging markets in Latin America (Urrutia (1995)) and Turkey

(Zychowicz et. al. (1995)). Interestingly, we also find Central European equity markets weak-form

efficient using weekly data, an hypothesis rejected by Zychowicz et. al. for Turkey.

IV) TESTS OF SEMI-STRONG AND STRONG-FORM MARKET EFFICIENCY

Semi-strong efficiency requires that no public information be useful in predicting the future

course of stock prices. In other work (Hanousek and Filer (1997) we have found that current but

not lagged values of monetary policy, trade figures and output measures are significantly related to

overall market indices in the Czech Republic, a result consistent with semi-strong efficiency. Thus.

basing investment decisions on government policies would not provide excess returns, a finding

consistent with semi-strong market efficiency.17 For the other three countries in the region,

however, (Hungary, Poland and Slovakia) we found that lagged values of at least some real

economic variables appeared to Granger-cause stock index levels. This represents a substantial

departure from efficiency.18

Other tests of semi-strong efficiency are possible for all of the markets under study but have

not been carried out yet. By the summer of 1997 many of the securities involved in the first wave

of Czech voucher privatization will have been traded for up to 48 months (208 weeks), with trading

for firms in the second wave having taken place for over 112 weeks. Although considerably smaller

than the Prague Stock Exchange, the exchanges in Budapest and Warsaw have been in operation for

a longer period (since 1990 and 1991 respectively). Thus there will soon be sufficient observations

to calculate betas for all publicly-traded firms19, enabling the investigation of whether returns are

related to factors such as capitalization or price/earnings ratios after accounting for conventional

measures of risk. Similarly, trading anomalies such as day-of-the-week effects should begin to be

visible in series of this length if they are characteristic of these markets.20

Tests of strong-form market efficiency are more problematic. By definition, it is impossible

for the researcher to observe inside information. Thus, tests of this form of efficiency have

typically relied on comparing the performance of those who might be supposed to have inside

information with that of other investors. The most widespread form of such a study asks whether

professionally managed mutual funds are able to outperform random investment strategies. Of

course, this leaves open the question of whether such funds actually have access to inside

information rather than simply having an incentive to hire the best analysts of public information.

17Note that the overall state of the economy will affect stock prices. Obviously there is strong influence betweenmonetary and fiscal policy and market value. This relationship is, however, contemporaneous so that a change in moneysupply in a given period is immediately reflected in stock prices in that period.

18In no case did we find a causal relationship going the other way such that equity prices predicted macroeconomicvariables. Thus it is clear that these markets are not efficient enough to rationally anticipate future policies or economicdevelopments. This finding is not surprising given the number and magnitude of the external shocks markets in thesecountries have faced as they have evolved towards a market economy over the past five years.18Low liquidity for some issues means that analysis of daily returns may be problematic in the Central European context.Estimation of betas will have to adjust for biases introduced by the failure of some securities to trade in a given interval.Techniques for such adjustments are well established (see, for example, Bartholdy and Riding (1994)).

20End-of-the-year effects will obviously be more problematic to detect with only three or four years of observations.

10

Unfortunately, the limited number of mutual funds in most Central European countries will

make such traditional tests impossible for countries other than the Czech Republic, where the special

situation created by voucher privatization makes such tests practical. In fact, one of the most

significant features of Czech voucher privatization was the role of mutual funds, known as

Investment Privatization Funds (IPFs). Before the bidding process started, each voucher holder had

the option of assigning all or part of his points to one or more of these funds. About three-quarters

of citizens eligible to participate in voucher privatization did so, with approximately 72 percent of

voucher points being placed with one of 264 IPFs, while 28 percent were retained by individuals.

There was substantial concentration among the IPFs, with over 56 percent of their points controlled

by the largest 13 funds. Behavior in the second wave was similar, with about the same fraction of

those eligible participating but somewhat fewer (63.5 percent) points being assigned to one of the

354 investment funds.

In terms of tests of strong-form efficiency, one additional aspect of the structure of these funds

is important. They were created and operated by a wide variety of entities including foreign banks

and investment firms, local banks, and individuals. Given the concentration of banking in the Czech

Republic and the interlocking relationship created by prior lending patterns, it is logical to assume

that funds managed by local banks would have greater access to inside information than those

managed by outsiders. Thus, a finding of no difference in the performance of these two types of

funds would be suggestive of strong-form efficiency.

V) THE EFFICIENCY OF CZECH VOUCHER PRIVATIZATION

Although it is still very early in the their development, the results discussed above at least

suggest that the emerging equity markets in Central Europe may exhibit a remarkably high degree of

efficiency equivalent to the level that prevails in more developed markets. The implication is that

efficiency can emerge quickly in new markets. Perhaps the best test of the speed at which a de nova

market can reach reasonable levels of efficiency is the artificial bidding market involved in the Czech

voucher privatization process. The first wave of voucher privatization took place in five bidding

rounds while the second had six rounds. Prices in the first round were the same for all stocks (since

the number of shares issued was determined by a firm's book value). In each successive round

prices were adjusted up or down as a function of the excess demand for or supply of the stock in the

previous round.21 We are in the process of conducting several related inquiries into the workings

of the voucher process. The first investigates the relative performance of professional investors

(i.e. mutual fund managers), individual investors, and a naive random strategy based on simply

bidding for a representative portfolio of all available shares. Since the constructed prices in the first

21See Svejnar and Singer (1994) and Hlavsa (1996).

11

rounds of the bidding process are unlikely to capture the true value of the firms up for auction, we

would expect to find that a random buying strategy should not perform as well as conscious

investment choices in the early phase of each wave. The interesting question for these rounds is

whether or not professional investors, on average, do better in picking stocks (as reflected by their

eventual market value) than individuals. A finding that they did would support the assertion thai

elites may be in a position to profit from inside information or other positional advantages.

We do find such a pattern (Filer and Hanousek (1996)). In the first wave of voucher

privatization the average market value per voucher point22 of shares bought in the first three rounds

by individual investors was only 76 percent of the value of shares bought by mutual funds. In the

second wave, the performance of individuals improved somewhat, with the average value per point

of shares they bought in the first three rounds being equal to 85 percent of the value of shares

bought by funds. By way of contrast, a random selections of stocks23 would have bought shares

worth 75 percent of what funds purchased per point in the first three rounds of the first wave and 66

percent of the value of funds' purchases in the first three rounds of the second wave. Thus.

individuals acted as if they had no information at all in the first wave but performed with a fair

degree of investment savvy in the second wave.

The efficiency of this artificial market is better assessed by observing the outcomes of the later

rounds in each wave. If this artificial market is strongly efficient, we would expect to find that by

the end of the voucher process neither professional investors nor individuals would be able, on

average, to perform better than a random purchasing strategy. While they did not do quite as well

as professionally managed funds, individuals averaged 97 percent of the value purchased per point by

investment funds in the final two rounds of wave one and the final three rounds of wave two. Even

a random purchase of shares achieved results equal to 91 percent of the value per point of shares

purchased by funds in the final two rounds of wave one and 93 percent of the professionals'

performance in the final three rounds of wave two. This suggests that if this artificial market were

not strongly efficient, it was not far from it.

A unique feature of the voucher process was the collection of a uniform set of information for

every firm that was made available to bidders in either published or electronic form. Thus, it is

easy to control for publicly available information. Hanousek and Kroch (1996) found that this public

information is important in explaining demand in the early rounds of the process but has no

22We calculate market value as the traded price on the Prague Stock Exchange several weeks after shares opened fortrading since initial prices were determined by the final voucher price, which may not be reflective of true value. Resultsare insensitive to the exact time at which values are determined and hold even several months later when many newinvestors had entered the market and much new information had become available.

23We constructed random portfolios based on allocating a fixed number of points in proportion to the price-weightedshares available in each round and assuming that the portfolio bought those shares that were actually sold in that round andretained for future rounds the points bid on shares that were not sold in a given round.

12

additional explanatory power once price is controlled for in later rounds. More interesting for our

purposes is their finding that the demand for a firm by individuals was strongly influenced by

demand for that firm by investment funds in previous rounds (something that was widely published)

even after controlling for price and other public information.24 This suggests that, despite the

findings reported above, individuals may have believed that the market was not efficient and that

funds had additional nonpublic information.

VI) SUMMARY AND CONCLUSION

The new equity markets of Central Europe present a decidedly mixed picture with respect to

their efficiency. The markets are very different in their size and structure. There is a widespread

belief that they can be manipulated by insiders who certainly have ample incentive to attempt to

appropriate assets in the privatization process. Yet despite all this, the markets in these countries are

similar in that, to the extent it is possible to test conventional types of efficiency with the limited

data available to date they do not appear less efficient than far more developed equity markets. If

these preliminary results hold as more sophisticated tests become possible, it will provide strong

evidence of the power of markets to achieve proper pricing in the most difficult of circumstances.

24See also the analysis by Ma and King (1996).

13

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Agrawal, A. and K. Tandon. "Anomalies or Illusions - Evidence from Stock Markets in 18 Countries."Journal of International Money and Finance 13 (1994): 83-106.

Ajayi, Richard and Seyed Meyhdian. "Tests of Investors' Reactions to Major Surprises: The Case ofEmerging Markets." Journal of International Financial Markets, Institutions, and Money 4 (1994):115-128.

Annuar, M., M. Ariff, and M. Shamsher. "Is Kuala Lumpur's Emerging Share Market Efficient?" Journalof International Financial Markets. Institutions, and Money 4 (1994): 89-100.

Ayada, 0. and C. Pyun. "An Application of Variance Ratio Test to the Korean Securities Market." Journalof Banking and Finance 18 (1994): 643-658.

Bartholdy, Jan and Allan Riding. "Thin Trading and the Estimation of Betas: The Efficacy of AlternativeTechniques." Journal of Financial Research 17 (1994): 241-254.

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Chow, K. Victor and Karen C. Denning. "A Simple Multiple Variance Ratio Test." Journal ofEconometrics 58 (1993): 385-401.

Claessens, Stijn, Susmita Dasgupta and Jack Glan. "Return Behavior in Emerging Stock Markets." TheWorld Bank Economic Review 9 (1995): 131-151.

Cornelius, Peter K. "A Note on the Informational Efficiency of Emerging Stock Markets."Weltwirtschaftliches Archiv 129 (1993): 820-828.

Demski, J. S. And G. A. Feltham. "Market Response to Financial Reports." Journal of Accounting andEconomics 17 (1994): 3-40.

Dye, R. A. "Mandatory vs. Voluntary Disclosures: The Cases of Financial and Real Externalities."Accounting Review 65 (1990): 1-24.

Filer, Randall K. and Jan Hanousek. "Efficiency in Newly Emerging Capital Markets: The Case of CzechVoucher Privatization." Prague: CERGE-EI Working Paper (1996).

Gordon, Barry and Libby Rittenberg. "The Warsaw Stock Exchange: A Test of Market Efficiency."Comparative Economic Studies 37 (1995): 1-27.

Hanousek, Jan and Randall K. Filer. "The Relationship Between the Real Economy and Equity Markets inCentral Europe." Prague: CERGE-EI Working Paper # 118 (1997)

Hanousek, Jan and Eugene Kroch. "Information in an Administered Closed-end Auction Market: The Caseof Czech Voucher Privatization." Prague: CERGE-EI Working Paper (1996)

Harvey, C. R. "Predictable Risk and Returns in Emerging Markets." Review of Financial Studies 8 (1995):773-816.

14

Hlavsa, Ales. "Determining Share Prices in Voucher Privatization." Prague, Charles University Faculty ofMathematics and Physics, Department of Probability and Statistics, Unpublished MA thesis (InCzech) (1996).

Leftwich, R. "Market Failure Fallacies and Accounting Information." Journal of Accounting andEconomics 2 (1980): 193-211.

Levene, H. "On the Power Function of Tests of Randomness Based on Runs Up and Down." Annals ofMathematical Statistics 23 (1952): 34-56.

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Lo, A. And C. MacKinlay. "Stock Market Prices Do Not Follow Random Walks." Review of FinancialStudies 1 (1988): 41-66.

Ma, Chia-Ying and Arthur E. King. "A Game Theory Model of Voucher Privatization." Taipei, Taiwan,ROC: Soochow University Department of Accounting, photocopy (1996).

Malkiel, Burton G. A Random Walk Down Wall Street (6th Edition). New York: W. W. Norton. 1996.

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Stengos, Thanasis and E. Panas. "Testing the Efficiency of the Athens Stock Exchange: Some Resultsfrom the Banking Sector." Empirical Economics 17 (1992): 239-252.

Stolin, M. R. And H. K. Ury. "Tables of Studentized Maximum Modulus Distribution and an Application toMultiple Comparisons Among Means." Technometrics 21 (1979): 87-93.

Svejnar, Jan and Miroslav Singer. "Using Vouchers to Privatize and Economy: The Czech and SlovakCase." Economics of Transition 2 (1994): 43-70.

Urrutia, Jorge L. "Tests of Random Walk and Market Efficient for Latin American Emerging EquityMarkets." Journal of Financial Research 18 (1995): 299-309.

Zychowicz, Edward J., Meral Binbasioglu, and Nebil Kazancioglu. "The Behavior of Prices on the IstanbulStock Exchange." Journal of International Financial Markets, Institutions and Money 5 (1995):61-71.

15

Table 1Extent and Liquidity of Equity Markets (1995)

Number of TradedFirms

Market Capitalization(millions of US$)

Market Cap/GDP

Turnover(millions of US$)

Turnover/Market Cap

Central Europe

Czech

1,635

15,664

.35

3,630

.25

Hungary

42

2,399

.06

355

.17

Poland

65

4,564

.04

2,770

.72

Slovakia

18

1,235

.08

831.7

.70

Asia

Malaysia

529

222,729

3.07

6,883

.03

Korea

721

181,955

.49

10,832

.06

Taiwan

347

187,206

.79

383,099

1.75

Indonesia

238

66,585

.39

14,403

.25

Thailand

416

141,507

.99

3,917

.03

Pakistan

764

9,286

.18

3,210

.29

Number of TradedFirms

Market Capitalization(millions of US$)

Market Cap/GDP

Turnover(millions of US$)

Turnover/Market Cap

Latin America

Argentina

149

37,783

.13

4,594

.12

Brazil

570

147,636

.27

5,493

.04

Chile

284

73,860

1.36

11,072

.15

Mexico

185

90,694

.24

34,377

.33

Venezuela

90

3,655

.06

510

.10

Other Europe

Greece

212

17,060

.21

6,091

.37

Portugal

169

18,362

.20

4,233

.23

Turkey

205

20,772

.16

51,392

2.26

France

450

522,053

.39

729,099

1.40

Germany

678

577,365

.28

1,147,097

1.99

16

Table 2Variance-Ratio Tests of Random Walk Hypothesis

Monthly ReturnsVariance Ratio

(z assuming homoskedasticity)(z' robust to heteroskedasticity)

Number of Lags

q = 3

q=6

q = 9

q=12

max z(q = 3..12)max z' (q = 3..12)

Czech Republic

1.89(3.48)*(1.01)

1.61(1.46)(0.38)

1.81(1.49)(0.40)

2.47(2.28)*(0.65)

(3.49)*(1.01)

Hungary

1.27(1.19)(0.40)

1.40(1.04)(0.33)

1.51(1.04)(0.29)

1.74(1.27)(0.32)

(1.27)(0.40)

Poland

1.35(1.53)(0.54)

1.80(2.09)*(0.67)

2.21(2.48)*(0.78)

2.57(2.72)*(0.83)

(2.99)(0.83)

Slovakia

1.64(2.50)*(0.44)

1.16(0.38)(0.06)

0.84(-0.30)(-0.05)

0.93(-0.11)(-0.02)

(2.50)(0.44)

*Indicates that variance ratio is significantly different from 1 at the 5% confidence level, thereby implying a rejectionof the random walk hypothesis.

17

Table 3Variance-Ratio Tests of Random Walk Hypothesis

Weekly ReturnsVariance Ratio

(z assuming homoskedasticity)(z' robust to heteroskedasticity)

Number of Lags

q=4

q = 8

q=13

q = 26

max z (q = 4..30)max z' (q = 4..30)

Czech Republic

2.07(6.85)*(1.21)

3.07(8.39)*(1.25)

3.78(8.50)*(1.17)

3.26(4.75)*(0.59)

(8.53)*(1.25)

Hungary

1.71(5.19)*d-34)

2.20(5.53)*(1.18)

2.59(5.55)*(1.03)

2.93(4.61)*(0.70)

(5.63)*(1.34)

Poland

1.29(2.15)*(0.71)

1.49(2.28)*(0.63)

1.91(3.17)*(0.75)

2.60(3.82)*(0.71)

(4.00)*(0.78)

Slovakia

2.31(8.53)*(1.09)

3.16(8.91)*(1.00)

3.55(7.94)*(0.78)

2.24(2.64)*(0.23)

(8.91)*(1.09)

*Indicates that variance ratio is significantly different from 1 at the 5% confidence level, thereby implying a rejectionof the random walk hypothesis.

18

Table 4Distribution of Returns in Central European Equity Markets

Mean

Standard Deviation

Skewness

Kurtosis - 3

Number ofObservations

Period ofObservation

Czech RepublicPX-50

WeeklyReturns

0.36%

4.8

1.82*

10.43*

144

MonthlyReturns

1.5%

13.3

1.36*

2.99*

34

9/93 - 7/96

HungaryBUX

WeeklyReturns

0.71%

3.6

0.95*

2.34*

187

MonthlyReturns

3.2%

11.3

1.15*

4.47*

42

1/93 - 7/96

PolandWIG

WeeklyReturns

1.3%

8.6

-0.14

1.80*

187

MonthlyReturns

6.0%

21.5

0.45

1.22

42

1/93 - 7/96

SlovakiaSAX

WeeklyReturns

0.53%

6.2

3.13*

22.34*

149

MonthlyReturns

2.2%

18.1

3.09*

13.74*

34

9/93 - 7/96

*Significantly different from 0 at the 5% confidence level. Standard error of skewness computed as [6/N]l/2 and ofkurtosis as [24/N]1/2 where N is the number of observations.

19

Table 5Runs Tests of Weak Form Efficiency

Number of Runs

Expected Numberof Runs

Standard Error ofExpected Runs

Number ofObservations

Z-score

Czech Republic

WeeklyReturns

8725

95.67

5.03

144

-1.72

MonthlyReturns

20

22.33

2.39

34

-0.98

Hungary

WeeklyReturns

121

124.33

5.74

187

-0.58

MonthlyReturns

26

27.67

2.67

42

-0.62

Poland

WeeklyReturns

117

124.33

5.74

187

-1.28

MonthlyReturns

29

27.67

2.67

42

0.50

Slovakia

WeeklyReturns

92

99

5.12

149

-1.37

MonthlyReturns

17

22.33

2.39

34

-2.23*

*Significantly different from 0 at 5% confidence level. The expected number of runs was calculated as [2N-l]/3where N equals the number of observations. The standard error of expected runs was calculated as [(16N-29)/90]1/2

25There is an issue regarding how to calculate the number of runs for the Prague Stock Exchange. There are periodsduring which the exchange did not trade for a week or more due to holidays. Since we are focusing on weekly returnswe must decide whether to ignore the "dark" weeks or to apportion the total return among them. We have done the latterin calculating the level of return but excluded constructed weeks in determining whether a run occurred. Thus, a totalreturn of 3% over three weeks was reduced to 1 % per week but only considered as one week in calculating the numberof runs so as not to create an artificial pattern by the equality of the created weekly returns.

20

FIGURE 1CAPITALIZATION OF EQUITY MARKETS/GDP

21

Appendix I

Disclosure Requirements of the Prague Stock Exchange26

A Prospectus for registration must include:

a) Introductory Provisions:

1) legal basis for issuing the security,ii) a copy of the decision made by relevant Ministry on granting permission to issue the

security or to trade it publicly,iii) purpose of the issue,iv) other relevant information important to investors (e. g. how the issuer discloses

information on his business activities and position),v) a disclaimer by the Stock Exchange stating that by having admitted the security to its Main Market

it assumes no liabilities attached to such securities.

b) Characteristics and conditions of the securities issue:

i) type, form and sample of the security,ii) ISIN,iii) total value of the issue and nominal value of the security,iv) price at issue or anticipated price,v) business names of stock traders who either were or are arranging for the issue,vi) date, place and way of releasing the issue (public offer, through a commission agent or within the

framework of a firm overtake),vii) type of subscription (free/open, preferential/with priorities, combination),viii) place of payment,ix) description of all rights associated with the security ownership (preemption and exchange rights

inclusive),x) method, deadlines and place of payment of the yields on the security and/or its repayment,xi) method of keeping records on status and movements of the security, provided the issue has only

been made as registered (in book-entry form),xii) shares structure (individual shares or bulk certificates),xiii) development in the share price for the last three years or from the time when the shares were

introduced to other public markets (this also applies to both convertible and option bonds),xiv) periods for holding General Meetings of Shareholders of joint stock companies,xv) a list of changes in all the facts subject to recording in the Commercial Register which have taken

place since the last entry,xvi) the way of disclosing the facts important for claiming holder's rights to the securities,xiii) method of taxation applicable to the yields on a given security,

c) Basic details about the issuer:

i) company business name, its legal status (form), principal office address, company ID (IEO)number, date of its commencement and/or termination of its business activities or termination ofits existence, if officially determined,

ii) basic organizational structure, including subsidiary companies, issuer's capital anticipation inbusinesses of other Czech or foreign entities, capital participation of Czech and foreign entities inthe issuer's business,

iii) for a joint-stock company also the names of all their shareholders holding more than 10% of itsshares; if known to the issuer,

26Sections applicable to stocks only. Omission of non-applicable material has resulted in renumbering for consistency.

22

iv) issuer's standing within the group of persons (entities) mutually linked by the property (eachproperty interest exceeding 10 % must be indicated).

v) company statement on existence of any whatsoever resolution of the General Meeting or right ofcompany statutory body to make decision on floating an issue of stocks and/or on any whatsoeverrights relating to the company registered capital (e. g. exchange bonds).

d) Information about issuer's business activities:

i) profile of business activities,ii) standing (position) in both domestic and foreign markets,iii) strategy for the economic activity, trade policies, main goals of its investment and innovation

policies, overall business prospects for at least a one-year period,iv) investments made by the issuer in the last three years, including those made by his legal

predecessor,v) business activities broken down by market type, share in turnover by individual market, sales

organization,vi) patents and licenses both own and contracted as well as contracts concluded with other persons

and having crucial importance to the issuer's business,vii) disputes both in the court (of law) and commercial if the disputed value exceeds 5 % of the

issuer's trading (employed) capital.

e) Issuer's financial position:

i) quarterly business (financial) results in a consolidated form (if produced), supported by balancesheet and profit/loss statement covering period from the last annual closing statement of accountsverified by the auditor,

ii) annual statements of accounts for the last three years verified by auditor(s) in a consolidated form(if produced); should the issuer have been existing in its current legal form for less than 3 years,he should submit either the same for his legal predecessor or reports covering period from thecompany emergence,

iii) auditor's statements covering period of the last three years,iv) details about securities already issued including: type, total value of the issue, number (volume)

and nominal (par) value, the amount of dividends paid per share for the last three trading yearsor from the company foundation, ratio of "dividends paid" to "post-tax profit" in percentage,

v) bank and other loans received and payables with indication of their maturity, broken down asfollows: short-term, long-term, non-performing credits (I. e. loans with payment overdue), typeand extent of default in payment (insolvency),

vi) registered capital: structure by individual type of shares, share holding capital structure by type ofshares, registered capital pending payment (not paid up yet), the option and exchange rights theregistered capital of the company is subject to,

vii) reserve fundsviii) amount of dividends and all changes in the registered capital for the last three years (dividend paid

per share),ix) any and all rights of lien/mortgage tied to the company assets if exceeding 5 % of the company

registered capital (state their total book value),x) characteristics of all impacts arising from long-term contractual relationship which may affect

company business results,xi) all company liabilities existing to the application date and implying from the guarantees issued.

f) Issuer's administration and management bodies:

i) statutory bodies,ii) supervisory bodies,iii) management bodies - managers (directors) the following details are to be stated for individual

members of these bodies: name, position (function), education, qualification/skills, professionalcompetence/fitness, data proving their "unblemished personal record" and/or the length of

23

sentence imposed for any property-related criminal act committed, information about theirbusiness activities outside the company scope of business and about their jobs, membership inbodies of other companies, share of these members in the company registered capital,

g) Closing provisions:i) names of persons who prepared the prospectus, including the date on which this was produced,ii) statement by persons responsible for the information stated in the prospectus confirming that this

is complete, true and accurate,iii) declaration of the issuer that he is assuming full responsibility for the correctness of the prospectus

and signature of the issuer's statutory body,iv) statement by bank on verification of the prospectus, including its business name, principal office

address, and signatures of authorized persons.

Once a security is listed on the main market, the issuer is obliged to submit to the Exchange:

a) quarterly income development indicators to the extent of a complete balance sheet and profit and lossstatement - within 8 weeks from end of a given quarter,

b) a copy of semi-annual business report encompassing a complete balance sheet and profit/loss statementtogether with the company comments - within 3 months from end of the respective 6-month period,

c) as many copies of annual report as there are Exchange members - without reasonable delay, after holdingthe Annual General Meeting of Shareholders,

d) a copy of closing statements of accounts to the extent of a complete balance sheet and profit and lossstatement, including an enclosure with the cash flow statement as its integral part - immediately afterthese have been verified by the auditor but no later than 6 months from end of the respective year,

e) in the course of the year, also the information about income development, including comments on thecompany financial position, in accordance with the requirements of the Exchange Chamber.

In addition, the issuer of the security admitted to trading in the Exchange Main Market is obliged to submit to theExchange without delay the following:

a) records taken of both regular and extraordinary General Meetings held by issuer's company,b) any changes in the Articles of Incorporation, by-laws (the Statutes), or Articles of Foundation

(Association or Deed of Foundation) of the issuer,c) changes in entries kept on the issuer in the Commercial Register.

The issuer of a security admitted to trading in the Exchange Main Market is also obliged, without delay, to publish andnotify the Exchange of any changes in his financial position as well as other facts which may directly or indirectlyinvoke a change in the price of the security or adversely affect the issuer's ability to comply with the obligationsarising from the issue of this security. The issuer is not allowed to inform any other person about such changes andfacts until these have been notified by him to the Exchange.

Among the specific items qualified as such changes and other facts are:a) Changes in the terms of issue and trading in the security admitted to trading in the Exchange Main

Market,b) Changes in the issuer's statutory, supervisory and management bodies,c) Changes in structure and size of the issuer's decisive (majority) shareholders, if known to him,d) Any new issue of securities,e) Any and each change in issuer's assets or net trading (employed) capital values by 10 % or more,f) Receipt or cancellation of important allotments and subsidies,g) Any disputes before the court of law or trade disputes if disputed subject value exceeds 5 % of issuer's

trading (employed) capital,h) Any decisions on a consolidation, merger, split, abolition and other important organizational changes as

well,i) Suspension or restrictions to issuer's activities on the basis of an official authorization (order),

24

j) Declaration in bankruptcy or approval of settlement proceedings,k) Acceptance or cancellation of important commercial orders,1) Market-sharing standing,m) Acquisition or disposal of significant patents or inventions,n) Shares in exports and imports,o) Changes in trading policy,p) Changes in production structure.

25